Lectures on urban economics

Lectures on Urban Economics Lectures on Urban Economics Jan K Brueckner The MIT Press Cambridge, Massachusetts London, England © 2011 Massachusetts Institute of Technology All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher For information on special quantity discounts, email special_sales@mitpress.mit.edu Set in Palatino by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data Brueckner, Jan K Lectures on urban economics / Jan K Brueckner p cm Includes bibliographical references and index ISBN 978-0-262-01636-0 (pbk : alk paper) Urban economics I Title HT321.B78 2011 330.09173'2—dc22 2011006524 10 Contents Preface 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4 3.5 3.6 3.7 ix Why Cities Exist Introduction Scale Economies Agglomeration Economies Transport Costs and Firm Location 10 The Interaction of Scale Economies and Transportation Costs in the Formation of Cities 16 Retail Agglomeration and the Economics of Shopping Centers 18 Summary 20 Analyzing Urban Spatial Structure Introduction 23 Basic Assumptions 25 Commuting Cost 26 Consumer Analysis 27 Analysis of Housing Production 33 Population Density 39 Intercity Predictions 42 Summary 50 23 Modifications of the Urban Model 51 Introduction 51 A City with Two Income Groups 51 Commuting by Freeway 56 Adding Employment Outside the CBD 57 Durable Housing Capital 61 Cities in Developing Countries 65 Summary 68 vi 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6.1 6.2 6.3 6.4 6.5 6.6 6.7 7.1 7.2 7.3 7.4 7.5 8.1 8.2 8.3 Contents Urban Sprawl and Land-Use Controls 69 Introduction 69 Empirical Evidence on the Spatial Sizes of Cities 70 Market Failures and Urban Sprawl 73 Behavioral Impacts of Urban Sprawl 80 Using Land-Use Controls to Attack Urban Sprawl 80 Other Types of Land-Use Controls 84 Summary 89 Freeway Congestion Introduction 91 Congestion Costs 92 91 The Demand for Freeway Use 95 Traffic Allocations: Equilibrium and Social Optimum Congestion Tolls 104 Choice of Freeway Capacity 110 Application to Airport Congestion 112 Summary 114 99 Housing Demand and Tenure Choice 115 Introduction 115 Housing Demand: The Traditional and Hedonic Approaches The User Costs of Housing 119 Tenure Choice 124 Down-Payment Requirements, Tenure Choice, and Mortgage Default 130 Property Abuse and Tenure Choice 133 Summary 136 Housing Policies Introduction 137 Rent Control 137 137 Housing-Subsidy Programs 145 Homelessness and Policies to Correct It Summary 157 Local Public Goods and Services Introduction 159 153 159 The Socially Optimal Level of a Public Good 161 Majority Voting and Voting with One’s Feet 163 116 Contents vii 8.4 8.5 8.6 8.7 Public-Good Congestion and Jurisdiction Sizes 174 Capitalization and Property-Value Maximization 179 Tax and Welfare Competition 183 Summary 185 Pollution 9.1 9.2 9.3 9.4 9.5 9.6 Introduction 187 Pollution from a Single Factory and Governmental Remedies 188 Bargaining as a Path to the Social Optimum: The Coase Theorem 196 Cap-and-Trade Systems 200 Evidence on Air Pollution and Property Values 204 Summary 205 10 Crime 187 207 Introduction 207 The Economic Theory of Crime 208 Additional Aspects of the Theory 215 How to Divide a Police Force Between Rich and Poor Neighborhoods 221 10.5 Summary 229 10.1 10.2 10.3 10.4 11 11.1 11.2 11.3 11.4 11.5 Urban Quality-of-Life Measurement Introduction 231 Theory: The Roback Model 233 Measuring Urban Quality of Life 241 Additional Issues 244 Summary 245 Exercises 247 References 273 Index 281 231 Preface This book offers a rigorous but nontechnical treatment of major topics in urban economics The book is directed toward several potential audiences It could be used as a main textbook, or possibly a supplementary book, in an undergraduate or master ’s-level urban economics course It could be used as background reading in a PhD-level course in which students would also read technical journal articles It could also be read by economists or researchers in other fields seeking to learn what urban economics is about To make the book accessible to a broad group of readers, the analysis is mostly diagrammatic A few chapters make use of some simple formulas and a bit of algebra, but calculus is almost absent Even though the treatment is nontechnical, the analysis of urban topics attempts to rely on rigorous economic reasoning The orientation is conceptual, with each chapter presenting and analyzing economic models that are relevant to the issue at hand In contrast to the cursory theoretical development often found in undergraduate textbooks, the various chapters offer thorough and exhaustive treatments of the relevant models, with the goal of exposing the logic of economic reasoning and teaching urban economics at the same time Because of its conceptual orientation, the book contains very little purely descriptive or factual material of the kind usually found in textbooks Instructors wishing to expose students to such material could supplement the book with other readings Some topics not associated with sharply defined models, such as urban poverty, receive no coverage Exercises are presented at the back of the book, for possible use when it is employed as an undergraduate text They develop numerical examples based on the models presented in the chapters Footnotes throughout the chapters point to exercises that are relevant to the current discussion Exercises 271 everyone to enjoy utility u To see one implication of the equation, solve it to yield p as a function of the other variables According to your solution, how must p change when amenities rise, with y held constant? Given an intuitive explanation of your answer How must p change if y were to rise, with amenities held constant? Again, explain your answer As was explained in the chapter, another condition is needed to pin down an explicit solution that tells how y and p vary as amenities change That condition comes from requiring that the production cost of firms be constant across locations To generate this condition, let the production function for bread be given by Dq1/2L1/2aθ, where q now represents the firm’s real-estate input, L is labor input and a again is amenities (D is a constant) The exponent θ could be either positive or negative, indicating that an increase in a could either raise or lower output Recalling that p is the price of real estate and y is the price of labor, it can be shown that the cost per unit of bread output is equal to p1/2y1/2a– θ (d) This function shows that an increase in p or y raises unit cost, but that an increase in a could either raise or lower costs Give an example for each possibility, identifying an amenity a valued by consumers that could alternatively raise, or lower, production costs for particular goods (e) The condition ensuring that costs are constant across locations can be written as p1/2y1/2a–θ = Suppose that θ > 0, so that higher amenities reduce costs What must happen to p as a increases to keep costs constant, with y held fixed? Give an intuitive explanation for your answer (f) To generate an explicit solution for y in terms of amenities, take the p solution from (c) and substitute it into the constant-cost condition from (e) The resulting equation just involves y, and use it to solve for y as a function of a (g) Suppose that θ is negative Using your solution from (f), how does y change when a increases? Suppose instead that θ is positive but that its magnitude is unknown Can you say how y responds to an increase in a? How about if θ is positive and small? How about if θ is positive and large? How about if θ is zero? (h) Now take the y solution from (f) and use it to eliminate y from the p solution in (c) Solve the resulting equation for p as a function of a Suppose that θ is positive How does p change when a increases? 272 Exercises Suppose instead that θ is negative but that its magnitude is unknown Can you say how p responds to an increase in a? How about if θ is negative but close to zero? How about if θ is negative and far from zero? How about if θ equals zero? (i) Summarize your conclusions about how amenities affect incomes and real-estate prices Although some conclusions are ambiguous, it is possible to offer a clear-cut statement when the effect of amenities on production is “small, ” either positive or negative (with θ close to zero) What conclusion can be stated in this case? (j) Relate your answer from (i) to the diagrammatic analysis from the chapter References Aaronson, Daniel 1998 Using Sibling Data to Estimate the Impact of Neighborhoods on Children’s Educational Outcomes Journal of Human Resources 33: 915–946 Alonso, William 1964 Location and Land Use Harvard University Press Anas, Alex, Richard Arnott, and Kenneth A Small 1994 Urban Spatial Structure Journal of Economic Literature 36: 1426–1464 Arnott, Richard 1995 Time for Revisionism on Rent Control? 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policies, 70, 75 Arnott, R., 24n, 145n Artle, R., 131n Automobiles, emission standards for, 200 Bangalore, 84 Basket weaving, 2–4, 17, 18 Baum-Snow, N., 72n Becker, G., 208 Behrman, J., 221n Benabou, R., 173n Berger, M., 232, 243n Bergstrom, T., 166n Bertaud, A., 85n Blight, 79 Block grants, 184 Blomquist, G., 232, 241–244 Boyer, R., 243 Bradford, D., 79n Brueckner, J., 20n, 24, 50n, 54, 55, 61, 68n, 70, 71, 76n, 79, 80, 81, 82n, 84n, 85n, 113n, 131n, 176, 182n, 184n Bruegmann, R., 70n Budget line or constraint, 28–31, 144–156 Building height, restrictions on, 70, 84–89 Burchfield, M., 69, 80n Burglary, 161, 221 Cap-and-trade system, 188, 200–205 Capital gains, 82, 84, 115, 116, 119–124 Carlino, G., 10 Central business district, 25, 51, 68, 76, 91, 169 Chatterjee, S., 10 Chay, K., 204 Chicago, 5, 23, 54, 113 Ciccone, A., 10 Clean Air Act, 204 Closed city, 49, 50 Coase, R., 196 Coase Theorem, 187, 196, 199, 205 Colwell, P., 154n Commuting money cost of, 26, 51, 53, 56, 75, 93 private cost of, 75, 95, 99, 104–110 social cost of, 75, 91, 95, 104, 109 tele-, 61 time cost of, 19, 26, 51–56, 68, 75, 91, 93, 107, 112 wasteful, 59, 60 Company town, 4, 5, 20, 129 Compensating differential, 29, 37, 179, 232–235, 238, 245 Congestion externality, 75, 76, 81, 91–94, 108 Congestion tolls, 75–82, 89–92, 104–108, 112–114 Cost, minimization of, 38, 227 Coulson, E., 33n Craig, S., 221n Crane, R., 60n 282 Crime, 215, 222, 224 Damage deposits, 136 Davidoff, T., 129n de Bartolome, C., 173n Demand, excess, 44, 45, 143, 144 Depreciation, 26, 115, 119–128 Developing countries, 51, 65, 67n, 68 Development tax, 74, 75, 79, 81, 89 Dietz, R., 128n Division of labor, 2, Down payments, 119n, 130–133, 136 Downs, A., 138n Eberts, R., 58n Economies agglomeration, 1, 2, 5–10, 20 of distance, 11–14 of scope, 179 localization, of scale, 1–5, 8, 16–21, 35 urbanization, Eid, J., 80 Equal-crime allocation, 226, 227 Equal-police allocation, 226, 227 Equity, in house, 132, 133 Evidence, empirical, 9, 10, 33, 37n, 40, 44n, 48, 49, 54n, 58, 59, 61n, 67n, 71, 80, 88, 115, 117, 128, 133, 138, 173, 176, 180, 220, 221, 242–245 Externalities, 8, 19–21, 74–76, 81, 86–95, 104–108, 114, 145, 151, 187, 191, 193, 196–200, 205 Fansler, D., 70, 71 Farming, 42–45, 69, 72, 73, 78 Filer, R., 157n Fiscal decentralization, 161 Fiscal zoning, 172 Fischel, W., 86n Flexible work schedules, 107 Floor area ratio, 84–86 Foote, C., 133n Foreclosure, 131, 132 Freeways, 93, 110, 111, 114 Fuel economy, 200 Fujita, M., 18n, 24n, 59n Gabriel, S., 243, 244 Gasoline tax, 24, 46, 47, 78, 108 Gentrification, 55 Gerardi, K., 133n Gill, H., 128n Index Giuliano, G., 59n Glaeser, E., 10, 24n, 54n, 70n, 89, 208, 219 Gobillon, L., 61n Goodman, A., 128n Greenstone, M., 204 Grether, D., 118 Growth, controlling, 82, 137 Guns, 207, 210, 212, 220 Gyourko, J., 89, 138, 144 Hall, R., 10 Hamilton, B., 60 Hanushek, E., 173n Harris, J., 67 Harris-Todaro Model, 67, 68 Haurin, D., 128n Head tax, 169–171, 183 Helsley, R., 79 Henderson, J V., 10 Henderson, R., 10 Henning, H., 204 Hirsch, W., 176 Hoehn, J., 232 Homelessness, 137, 153–157 Honig, M., 157n Households, mobility of, 54, 129, 169, 219 Housing attributes of, 115–118, 136 developers of, 34–46, 66, 73, 78, 79, 88, 124, 138, 142, 143, 152, 156, 177, 183, 185 monopolized market for, 145 owner-occupied, 122–124 public, 149–152 rental, 124, 125 single-room-occupancy, 155, 156 subsidies for, 137, 145–153 vouchers for, 149–151 Housing bubble, 116, 123, 130–133 Housing capital durable, 62, 68, 139 malleable, 61, 65, 68 Houston, 5, 88 Hoxby, C., 185n Huang, J.-C., 204 Hunt, R., 10 Ihlanfeldt, K., 61n, 88 Impact fees, 78, 88 Impatience, 130, 131 Implicit price, 118, 136 Imputed rent, 120, 121n Income elasticity, 54n, 117, 154 Income grants, 147–151 Index Indifference curve, 28–33, 147–149, 154–156, 233–240 Indirect utility function, 233 Infrastructure, 71, 77, 78, 84 Intercity predictions, 42, 43, 48–50 Iso-crime line, 228 Iso-profit curve, 236–240 Isoquant, 38, 39 Itemized deductions, 120n Jaffe, A., 10 Job decentralization, 25 Jurisdictions homogeneity of, 72n, 160, 168–173, 176–179, 185 optimal size of, 175–178 Kahn, M., 54n, 70n Katz, L., 153 Kelejian, H., 79n Kelley, A., 68n Kim, H., 68n Kling, J., 153 Knowledge, spillovers of, 8–10, 20 Krol, R., 144n Krugman, P., 16 Labor market, 5, 218, 220 Lai, F.-C., 84n Landing fees, 113, 114 Largey, A., 80 Leape, J., 77n Lee, K., 219n Leisure, 53 LeRoy, S., 54n Levitt, S., 220 Liebman, J., 153 Linneman, P., 138, 144, 145 Locational equilibrium, 28 London, 77, 107 Los Angeles, 137, 187, 200, 243 Low-Income Housing Tax Credit program, 152 Maintenance, of homes, 79, 119, 124, 130, 138, 157 Majority voting, 161, 166, 168, 177n, 180 Manhattan, 36, 86 Marginal social benefit, of public good, 162, 163, 181n, 182, 185 Mariel boatlift, 141 Market failure, 72–82, 89 283 Matching grants, 184 Mayo, S., 117n McDonald, J., 40n McGrath, D., 70, 71 McMillen, D., 37n, 39n Median voter, 164–167 Mental illness, 154 Metropolitan government, 173 Mexico City, 67n, 187 Miami, 141–144, 243 Mieszkowski, P., 118 Migration, 48–51, 65–68, 184, 245 Mills, E., 24 Minimum-crime allocation, 226–229 Minimum dwelling size, 155–157 Minimum lot size, 86, 172 Mortgages, 115, 118n, 119–124, 127–136 defaults on, 131–134 interest on, 115, 118n, 119–123, 127, 136 Moving to Opportunity program, 153, 218 Mumbai, 84 Muth, R., 24 Narwold, A., 126, 128n Nechyba, T., 70n, 72n, 173n Neighborhood effects, 153, 173, 208, 218 New Haven, 118 New York, 23, 24, 54, 113, 137, 138, 144, 243 Ng, C., 60n Oates, W., 180n Obesity, 69, 80, 205 Occupational choice, 208, 210, 213, 217, 219 O’Flaherty, B., 153n Ogawa, H., 59n Open city, 49, 50n, 65 Open space, 73–76, 81–83, 89 Oreopoulos, P., 153n Output per worker, 2–4, 11 Pack, H., 169n Pack, J., 169n Papageorgiou, Y., 24n Paris, 36, 55, 84, 85 Parking, charges for, 108 Parks, 75, 77, 159, 160 Patents, 7, 8, 10 Peer-group effects, 173 284 Peoria, 46 Pigou, A., 193 Pigouvian tax, 106n, 193–195, 200, 202, 205 Pines, D., 24n Pinto, S., 219n Police protection, 160, 161, 174, 178–181, 221 Pollution abatement, 189–193, 197–205 Pollution rights, 200–204 Pollution standard, 193, 195, 200, 202, 205 Polycentric city, 58, 59 Population density, 23, 39–41, 44–50, 57, 59, 67 Portland, Oregon, 81, 243, 244 Portney, P., 179 Price elasticity, 117 Price function, hedonic, 33, 115–118, 136, 179, 180, 204, 242, 244 Pride of ownership, 129, 136 Prisons, 207, 209, 212–215, 219, 220 Production, centralized vs dispersed, 16–18 Production function, 3, 7, 8, 34, 35 Production processes weight-gaining, 15 weight-losing, 14, 15 Productivity, 2, 5, 9, 10, 20, 66, 222–229 Property, abuse of, 133–136 Property rights, 196–199, 205 Property tax, 77, 78, 119–124, 127, 128, 134, 136, 169–172, 179–184 Property value, maximization of, 161, 182 Proportional rent subsidies, 146–155 Public-good congestion, 174, 176, 215, 216n Public transit, 26, 54, 70n, 107, 108 Pure public good, 174, 176n Quality of life, 84, 152, 187, 207, 231, 232, 241–245 Quigley, J., 118n, 154 Radial roads, 25, 56n, 68, 72n Raphael, S., 157 Rappaport, J., 54n, 245 Redevelopment, 62, 64, 69, 79 Rent control, 137, 138, 141–145, 157 Rent seeking, 185 Retail agglomeration, 18–21 Rhee, H.-J., 61n Rhode, P., 169n Index Ridker, R., 204 Roback J., 232, 233, 241 Rosen, S., 118 Rosenthal, S., 10, 55, 243, 244 Sacerdote, B., 219 Saks, R., 89 Savageau, D., 243 Scale constant returns to, 35, 112, 235 economies of, 1–5, 8, 16–21, 35 Scheinkman, J., 219 Schools, 77, 78, 160, 169, 172 Scotchmer, S., 177n Section 236 program, 152 Self-financing, 112 Self-selection, 80, 153, 205n Selod, H., 61n Sewage and sanitation districts, 178 Shipping, cost of, 6, 7, 11, 13 Shopping, 19 Shopping malls, 18, 19 Shoup, C., 221n Shoup, D., 108 Sinai, T., 129n Singapore, 77, 107 Sjoquist, D., 61n Slums, 145–153, 157 Small, K., 24n, 59n, 76n, 92n, 112n Smith, V., 204 Smolensky, E., 157 Social interaction, 69, 80 Social networks, 208, 218, 219, 230 Social planners, 73, 101, 104, 105, 163, 165 Social surplus, 192, 194, 198, 199 Sonstelie, J., 54n, 126, 128n, 179, 180 Souleles, N., 129n Spatial mismatch, 60, 61 Spatial structure, 23, 24, 27, 28, 31, 37, 43–45, 49–55, 76, 81 Special districts, 159, 177 State aid to localities, 172, 173 St Louis, 204 Stock-flow model, 139, 141 Stockholm, 77, 107 Strange, W., 10 Strumpf, K., 169n Subcenters, 25, 51, 58, 59n Substance abuse, 154–157 Suburbs, 23, 24, 37–40, 46, 47, 51–55, 60, 68, 69, 76–80, 173, 231 Index Supply-demand equilibrium, 43, 44, 66 Svorny, S., 144n Tax competition, 161, 183–185, 219, 220 Tax deductibility, 122, 127 Tax subsidies, 78, 121n, 137, 145 Tenure choice, 115, 116, 126–136 Ter-Minassian, T., 161n Thisse, J.-F., 18n, 55 Tiebout, C., 160, 177n Todaro, M., 67 Traffic allocation, 99–101, 102n Trajtenberg, M., 10 Transformation curve, 224–228 Transportation costs, 2, 16–20 Transport mode, 12n, 27, 54n Transshipment, 15n Trefzger, J., 154n Tucson, 46, 243 Urban growth, 70, 81–84, 88, 89 Urban sprawl, 69–75, 80, 85, 89, 172, 173, 205 Varaiya, P., 131n 285 Verhoef, E., 76n, 92n, 112n Voting with one’s feet, 160, 167–173, 176–180, 183–185 Wage equation, hedonic, 242, 244 Wage gradient, 58 Waldner, W., 243n Walsh, R., 70n, 72n, 173 Washington, 84, 85, 243 Weitzman, M., 196 Welfare benefits, 184 Welfare competition, 161, 184, 219, 220 Wheaton, W., 24, 54n, 76n, 172n Wildasin, D., 177n Willen, P., 133n Williams, J., 135n Williamson, J., 68n Wilson, J., 183n Yard space, 27, 35, 36 Zenou, Y., 55, 61n, 219 Zoning, 70, 86–88, 137, 172 .. .Lectures on Urban Economics Lectures on Urban Economics Jan K Brueckner The MIT Press Cambridge, Massachusetts London, England © 2011 Massachusetts Institute... vacations The suburban resident’s consumption, in contrast, is skewed toward housing consumption, with less emphasis on bread Given that the city only has one income group, this prediction may... Introduction Scale Economies Agglomeration Economies Transport Costs and Firm Location 10 The Interaction of Scale Economies and Transportation Costs in the Formation of Cities 16 Retail Agglomeration